due_logo
Search
Close this search box.

Table of Contents

Special Drawing Rights (SDR)



Definition

Special Drawing Rights (SDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are not a currency, but rather a potential claim on the freely usable currencies of IMF members. They can be exchanged for these currencies, providing liquidity to the global economic system.

Phonetic

The phonetic pronunciation of the term “Special Drawing Rights (SDR)” would be:Spesh-ul Draw-ing Ry-ts (Ess Dee Ar)

Key Takeaways

  1. Special Drawing Rights (SDR) is an international monetary reserve currency created by the International Monetary Fund (IMF). It was designed to supplement the official reserves of the IMF’s member countries.
  2. The value of SDR is based on a basket of five major currencies: the U.S. dollar, euro, Chinese yuan, Japanese yen, and the British pound, and it is recalculated on a daily basis. Its role is to provide liquidity to the global economic system and serve as a supplement to the member countries’ official reserves.
  3. SDRs are not physical currency or claim on the IMF rather, they represent a claim to currency held by IMF member countries for which they may be exchanged. While they are often seen as a potential source of liquidity during economic crisis, they do not provide an automatic solution for balance of payments assistance, as its usage requires the agreement of the IMF members.

Importance

Special Drawing Rights (SDR) are significant in the domain of finance and business due to their role in contributing to global financial stability. SDRs are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). They can be exchanged among governments for freely usable currencies in times of balance of payments difficulties, effectively supporting countries without sufficient reserve assets. SDRs also serve as the unit of account of the IMF, making them essential to international financial operations. Their importance is underscored during global economic crises when liquidity is strained across nations and there is a need for an additional source of reserves.

Explanation

Special Drawing Rights (SDR) predominantly serves as an international reserve asset, designed to supplement the official reserves of the International Monetary Fund’s (IMF) member countries. Its purpose is rooted in providing additional liquidity to the global economic system by complementing the standard reserve currencies: the U.S. dollar, euro, Chinese yuan, Japanese yen, and the British pound. When countries face balance of payments problems, this asset becomes crucial as it aids these nations by providing them with the capacity to acquire any of the above mentioned IMF’s member currencies, which in turn can be used to rectify their financial imbalances.SDRs also play a pivotal role in providing a pragmatic solution during a financial crisis. When the demand for secure assets exceeds the availability, the IMF can simply allocate more SDRs to economies, hence relieving them of the possible financial tension. As such, SDRs are not subject to the credit risks associated with traditional forms of borrowing, making it a more appealing option during tough economic times. In summary, Special Drawing Rights (SDRs) is a potential financial instrument that provides stability and supplements liquidity to the global economic system when traditional reserve assets fall short.

Examples

1. The International Monetary Fund (IMF): The most distinctive and common use of Special Drawing Rights (SDR) is at the IMF, an international organization working to promote global monetary cooperation. The IMF created the Special Drawing Rights as an international reserve asset, which functions like a currency. Member countries can exchange their SDRs for widely accepted currencies (e.g., USD, GBP, EUR, JPY, and CNY) to better manage their financial situation, especially during financial crises. 2. The 2009 Global Financial Crisis: During the 2009 global financial crisis, the IMF distributed $250 billion worth of SDRs to its member countries to counter the global economic downturn. This action increased liquidity in the global financial system by supplementing the member countries’ currency reserves.3. China and SDRs: In 2016, the Chinese Yuan was added to the SDR currency basket, joining the US Dollar, the Euro, the Japanese Yen, and the British Pound. This change recognized the increasing role of the Yuan in global trade and finance and reflected China’s growing global economic influence.

Frequently Asked Questions(FAQ)

What are Special Drawing Rights (SDRs)?

Special Drawing Rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). They are not a currency but rather a claim to currency held by IMF member countries for which they may be exchanged.

Who uses Special Drawing Rights (SDR)?

Special Drawing Rights (SDRs) are used by the IMF and its member countries. They are used in transactions between the IMF and its members, and also among the member countries themselves.

What is the value of an SDR?

The value of the SDR is based on a basket of five major currencies: the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The value fluctuates daily and is published by the IMF.

How does an SDR work?

SDRs can be exchanged for freely usable currencies. Countries with excessive foreign exchange reserves can sell their SDRs to countries that need to augment their foreign exchange reserves. These transactions are facilitated by the IMF.

Can an individual or a business hold SDRs?

No, SDRs are held exclusively by the IMF and its member countries. They cannot be held by individuals or corporate entities. They are also not a form of cryptocurrency.

Can SDRs be used as a global currency?

While SDRs serve as the unit of account for the IMF and some other international organizations, they are not a global currency, as they are not used in everyday economic transactions and not held by individuals or businesses.

Can the value of SDRs fluctuate?

Yes, the value of SDRs can fluctuate because they are based on a basket of international currencies. If the exchange rates between these currencies fluctuate, the value of the SDR will fluctuate as well.

How often is the SDR basket reviewed?

The SDR basket is reviewed every five years by the IMF’s Executive Board or earlier if warranted by developments. The reviews ensure that the SDR reflects the relative importance of currencies in the world’s trading and financial systems.

Related Finance Terms

Sources for More Information


About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More